Internet Explorer 6 is not supported This site has been built to work in either Internet Explorer 8 and above, Firefox, Chrome or Safari. For a better experience of using this site, please switch your browser or install
Chrome Frame

Register to get unlimited access to all of Citywire’s Fund Manager database. Registration is free and only takes a minute.

Sponsors of Citywire search

MFS veteran warns on hyped-up HY and shale

By Chris Sloley
on 11 January 2013

MFS chief investment strategist James Swanson has little faith in a European recovery and believes the emerging market debt picture will once again outperform in the coming year.

The 27-year market veteran set out his major themes, challenges and potential surprises at a roundtable event in London.

Beware the shale revolution

‘It is madness this prognostication that the United States is going to be a net exporter of shale in the near to mid-term. It makes no sense to me at all,’ said Swanson.

‘It is all based on oil still being at $100 per barrel once shale oil and gas is at a transferable and useable stage but once it gets to the level where it can be moved and used freely then the price of oil will collapse. The Middle East will always win this game.’

‘Of course an abundance of cheap natural gas will be a big help to the US manufacturing sector and also help with regards to exports, but I don’t think it is going to be a miracle in the way a lot of people think it will be.’

End of the road for high yield

‘I am a sceptic on high yield. The mathematics of it does not stack up. If you look at the way it reacts in comparison to the S&P 500, it rises when it does and it falls when it does, so high yield has an essentially equity-like characteristic.’

‘However, if you buy into the belief that the market is okay and equities are cheap and set to rise, then why don’t you buy equities instead of high yield? They don’t have the risk/return asymmetry in the same way as high yield, which is simply not symmetrical.’

‘If you believe in the US economy then the expectation is for a mid to end of cycle scenario in which it is better to own equity rather than be chasing higher yielding fixed income. I have seen it before and this pursuit of yield always ends badly.’

Now is the time for EM corporates

‘The default rates have come down and this is not just because of the economic situation improving but corporate governance is also improving at a company level. This is even the case in Russia, which would be the most extreme case, where corporate governance is definitely improving.’

‘I personally like it and I am pursuing it more and more. The bulk of work we have been doing in EMD has been in sovereign debt and we currently have an 80/20 split between government debt and EM corporate debt.’

‘I am not saying we are going to take this to 50/50 but, with corporate governance improving and the economic situation in those countries also improving, I can see us moving it gradually to something more like 60/40.’

Europe is crippled by its own construction

‘The risk of a country defaulting or Greece or Portugal leaving or a bank collapse happening is still there. But if you look at it, the most interesting thing is the German economy, which is so different to the rest of the world that it stands out as an anomaly even in the eurozone.’

‘They are a 50% export driven economy, so if you followed the money then they need the eurozone and what Merkel has to explain to the 52-year-old factory worker in Leipzig, who is working long hours while it snows outside, is it is in their interest to cough up for the Greek 52-year-old who is out having his retirement on the beach. That is the fact of the matter, it is better for Germany.’

‘If they were to allow themselves to go back to the deutschmark and print their own money then they know what will happen, they saw it with the Swiss franc. It will appreciate so fast and so strongly that they will not be able to trade. It would be a catastrophe for the German economy. So they need the eurozone to survive and they have to keep paying for it.’

Draghi will not ride to the rescue

‘Don’t think that the ECB is going to solve the debt crisis problem in the long run. They have so far, and will continue to, put together short term plans to move it along into the future. They are effectively working hard enough to hold it together and no harder.’

‘This is because the debt-to-GDP problem has got to such a position, that the only way for them to recover is to grow their way out of it but that is not possible. You either grow your way out of it or you export your way out of it, but neither of these can really happen.'

We use cookies to give you the best experience on our website. You can continue to use the website and we'll assume that you are happy to receive cookies. If you would like to, you can find out more about cookies and managing them at any time here. This site is for Professional Investors only, please read our Risk Disclosure Notice for Citywire’s general investment warnings